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Ideas for advanced fundraising

Given the competition for donor dollars it is surprising that gifts of non-qualified securities do not attract more attention. These types of securities are usually shares or debt of private corporations. As private corporations and their shareholders form a significant segment of the Canadian economy, charities can ill afford to ignore the tremendous value locked up in these instruments.

One interesting strategy involving the donation of shares for a private company involves a situation where a shareholder of a private company donates shares to an arm's length charity. Under normal circumstances it can be very difficult to turn these kinds of shares into the cash necessary for the charity's operation because of restrictions on the selling of the shares, or because the market for private securities is limited. So part of planning the donation should involve liquidating these types of shares.

An important aspect of the transaction involves redesigning the share structure so that the donated shares may be repurchased by the corporation if it wishes. In this case, the purchase price of the shares is usually set in advance. This also has the benefit of making clear what the valuation of the shares is at the time of donation. If the corporation actually does repurchase the shares, the treatment, from a tax perspective, is that the repurchase of the shares is generally a taxable dividend. As a consequence there is an increase in the corporate refundable dividend tax on hand account (the RDTOH Account) which effectively reduces the cost to the corporation of repurchasing the shares by approximately 1/3.

One problem with repurchasing the shares may be that the corporation does not have the necessary funds to carry out the transaction, or that doing so would unduly impact the operations of the business. The answer to this problem may be a life insurance policy on the life of the donor purchased, and paid for, by the corporation. While the premiums are not deductible to the corporation, when the life insurance policy pays out, the corporation will then have the cash necessary to repurchase the shares from the corporation.

In this circumstance the RDTOH account will again act to reduce the purchase price by 1/3. Moreover, the payout of the life insurance premiums will increase the capital dividend account of the corporation to the extent of the life insurance payout. This effectively means that the corporation will be able to distribute to the shareholders an additional amount of money equal to the life insurance payout on a tax free basis. The net result is that the actual cost to the corporation and the other shareholders is in fact quite reduced and the total cost of the donation is significantly less than it would otherwise appear.

These concepts are, to most people, quite complicated yet together they represent a significant planning opportunity. And they may have particular application if used to unlock some of the massive amount of wealth which is being transferred from the baby-boomer generation to its heirs. We would strongly encourage any charity to consider this an option and invite interested readers to contact us for help in structuring these donations.

Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer, Canadian Fundraising & Philanthropy and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute.

As a speaker, he has addressed many professional associations and Canadian charities. He has also given expert advice on Parliament Hill. Adam is an executive member of the Canadian Bar Association’s Charity and Not-for-Profit Law section. Contact him at 613-237-3300 or visit http://www.drache.ca.